No panacea for growth pangs in low-key Budget
Sushma Ramachandran
Senior Financial Journalist
The second Nirmala Sitharaman-scripted Budget was much awaited as a chance to pull the economy out of its slough with a dynamic stimulus. The big bang has not exactly taken place. It is a patchy Budget with some brilliant ideas, some mundane and some bordering on the regressive. It has not enthused the stock markets even though the focus is clearly on the corporate sector and the need to lure investment into broad swathes of the economy both from foreign and domestic investors.
On the key issue of fiscal deficit, the Budget has delivered as expected, taking advantage of the escape clause in the Fiscal Responsibility and Budget Management Act to raise the numbers by 0.5 per cent. Hence, the deficit in 2019-20 goes up to 3.8 per cent in the revised estimates and is contained at 3.5 per cent in the budgetary estimates for 2020-21. Such figures are likely to be acceptable even to rating agencies and yet give enough leeway to raise spending especially on infrastructure.
On the demand side, it has disappointed by not taking the opportunity to raise outlays on the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) which could have given a big boost to consumption in the rural sector. The allocation has been kept static at Rs 61,500 crore despite the revised estimates for 2019-20 having touched Rs 71,000 crore. Even the PM-Kisan Yojana funds were not fully transmitted in 2019-20 but the outlay has been restored to the original Rs 75,000 crore in 2020-21. Though a slew of measures have been taken for the agriculture sector, higher utilisation of these two schemes could have given a significant push to consumption in rural areas and thus led to a revival of economic growth.
On the plus side, agricultural credit target has been raised by as much as Rs 3 lakh crore and the plans to persuade states to adopt model land leasing and contract farming legislation are laudable as are schemes meant to promote cold chain and warehousing projects, along with the thrust on dairy processing and fish development. Even so, there is little evidence that the target of doubling farmers’ income by 2022 will be helped along by this Budget.
Some bold steps have been taken, however, on the investment and
taxation front. First, the long-
pending demand of the industry to remove the dividend distribution tax from companies while retaining it in the hands of the recipient should be welcomed as it eliminates the legitimate complaint that dividends face double taxation.
Second, the decision to offer exemption-free lower personal tax slabs is a step in the right direction, moving towards a simplified tax system. The option of remaining in the existing regime continues for taxpayers for the time being. But whether this kind of qualified reduction in personal income tax will bring about a rise in consumption is a moot point. Especially since the higher tax slabs going up to 42 per cent have not been touched. There was more resolve and clarity in the earlier cut in corporate taxes.
A new direct taxes dispute settlement scheme is more in the category of brilliant, though it has been preceded by a similar successful one to deal with indirect tax disputes. With 4.83 lakh cases languishing in various appellate tribunals, this is a smart way to cut the Gordian knot of the clogging of quasi-judicial forums. The idea for a taxpayers’ charter to address the problems of harassment seems to be an effort to remove the perceptions about tax terrorism and bureaucratic overreach.
To fund the much-needed spending on infrastructure, the Budget provides Rs 2.1 lakh crore for public sector disinvestment, of which nearly half will be accounted for by divesting stakes in LIC and IDBI. Given past delays, the full amount may not fructify in 2020-21. More to the point, the Budget proposes tax breaks for sovereign wealth funds if they invest in this sector. This is likely to tie up well with projects slated under the already announced National Infrastructure Pipeline. An allocation of Rs. 1.7 lakh crore has been made for transport infrastructure projects in the pipeline for 2020-21.
These measures should ideally lead to a significant rise in infrastructure implementation which should, in turn, boost employment. But they can only have a medium-term impact and cannot arrest the economic slowdown immediately.
Start-ups have been given special attention with tax incentives being expanded and the tax on employee stock options being deferred.
While this is all positive, a one per cent cess has been levied on online transactions that will make purchases more expensive on e-commerce aggregators. This is a strange objective for a government that is a fierce advocate of digitisation of the economy. Clearly, it is a measure meant to appease the large retailer constituency of the BJP.
The Budget also declares its intent to make every district an export hub, but there is little clarity on the way ahead. On imports, on the other hand, regressive policies of protectionism have come to the fore in a misguided move towards Nehruvian import substitution. Import tariffs on furniture, toys and medical equipment have been hiked on the grounds that these are being produced within the country.
In the modern multilateral trade era, issues related to dumping need to be raised at the World Trade Organisation, as is being done by several countries against India itself rather than by raising customs duties.
In sum, it is a Budget that lacks an overall vision despite its mammoth length and lofty quotations. The need of the hour is to stimulate demand while giving a push to investment. It has little to boost consumption, barring restructuring of personal income tax. Infrastructure spending is likely to step up significantly and this is all to the good.
But industrial growth can only pick up if there are buyers for goods. And faster economic growth depends on growth in output. The Sitharaman Budget 2.0 provides no panacea for this basic dilemma.
